Bayou Hedge Funds Investment Litigation 0501762-Amended Class Action Complaint

100 Pages·2007·3.84 MB·English

UNITED STATESDISTRICT COURT
FOR THE DISTRICT OF CONNECTICUT
BROAD-BUSSEL FAMILY LIMITED
PARTNERSHIP, MARIE-LOUISE
MICHELSOHN, MICHELLE MICHELSOHN
and HERBERT BLAINE LAWSON, JR., :
Individually and on Behalf of All Other
Persons and Entities Similarly Situated,
CIVIL ACTION NO. 3:05-CV-01762-JBA
Plaintiffs,
vs. : AMENDED CLASS ACTION COMPLAINT
BAYOU GROUP LLC,
BAYOU MANAGEMENT LLC,
BAYOU FUND, LLC,
BAYOU SUPER FUND, LLC,
BAYOU NO LEVERAGE FUND, LLC, JURY TRIAL DEMANDED
BAYOU AFFILIATES FUND, LLC
BAYOU ACCREDITED FUND, LLC,
BAYOU OFFSHORE FUND, LLC,
BAYOU PARTNERS LLC,
BAYOU SECURITIES LLC,
BAYOU SECURITIES, LTD,
BAYOU ADVISORS, LLC,
BAYOU EQUITIES, LLC,
IM PARTNERS, IMG, LLC,
SAMUEL ISRAEL, III7 DANIEL E. MARINO,
RICHMOND-.FAIRFIELD ASSOCIATES,
CPA, PLLC, JAMES G. MARQUEZ,
JEFFREY D. FOTTA, EQYTY RESEARCH
AND MANAGEMENT, LLC,
EQYTY RESEARCH AND MANAGEMENT,
LTD, CITIBANK N.A.,
FAUST RABBACH & OPPENHEIM LLP,
STEVEN D. OPPENHEIM,
HENNESSEE GROUP LLC,
ELIZABETH LEE HENNESSEE, and
CHARLES J. GRADANTE, March 6, 2006
Defendants.
Plaintiffs Broad-Bussel Family Limited Partnership ("Broad-Bussel Family"), Marie-
Louise Michelsohn, Michelle Michelsohn and Herbert Blaine Lawson, Jr. (collectively,
"Plaintiffs"), individually and on behalf of all other persons and entities similarly situated, as and
for their Amended Complaint against defendants ("Defendants"), allege as follows :
NATURE OF ACTION
During the period between at least December 31, 1996 and August 25, 2005 (th e
"Class Period"), defendants Bayou Super Fund, LLC, Bayou No Leverage Fund, LLC, Bayou
Affiliates Fund, LLC, Bayou Accredited Fund, LLC, Bayou Offshore Fund, LLC, and Bayou
Fund, LLC (collectively, the "Bayou Hedge Funds"),' and defendants Bayou Group LLC, Bayou
Management LLC, Bayou Securities LLC, Bayou Securities, LTD, Bayou Partners LLC, Bayou
Advisors, LLC, Bayou Equities, LLC, IM Partners, IMG, LLC, Samuel Israel, III and Daniel E .
Marino (collectively, with the Bayou Hedge Funds, the "Bayou Defendants" or "Bayou")
solicited, sold, operated and/or participated in the operations of the Bayou Hedge Funds . On
August 25, 2005, the financial press began to reveal that Bayou had long been operated as a
fraud, with its principals having misappropriated literally millions of investor dollars. Plaintiffs
and other similarly situated investors purchased investment interests in one or more of the Bayou
Hedge Funds during the Class Period, and were damaged thereby (the "Class") . In total,
Plaintiffs and members of the Class invested more than $450 million in the Bayou Hedge Fund s
during the Class Period.
' The Bayou Hedge Funds also include the following Bayou entities that are not named as
defendants in this Amended Complaint because they are in bankruptcy and an injunction has been issued
precluding any such lawsuits, as explained more fully in ¶ 44 below: Bayou Offshore Fund A, LTD;
Bayou Offshore Fund B, LTD; Bayou Offshore Fund C, LTD; Bayou Offshore Fund D, LTD; Bayou
Offshore Fund E, LTD; Bayou Offshore Fund F, LTD; and Bayou Offshore Master Fund, LTD.
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2. The Bayou fraud was accomplished with the active and substantial participation
of Bayou's bankers, lawyers and advisors . Indeed, almost since their inception, the Bayou
Hedge Funds have essentially operated as a massive financial sham and Ponzi scheme
orchestrated by the Bayou Defendants. In sum, the Bayou Defendants fraudulently lured
investors to invest and maintain hundreds of millions of dollars in the Bayou Hedge Fund s
during the Class Period, through a scheme of improper acts and continuing misrepresentations
and omissions regarding the business practices and financial results, operations and condition of
Bayou and the Bayou Hedge Funds. The Bayou Defendants, and in particular their principals
including defendants Samuel Israel, III ("Israel") and Daniel E. Marino ("Marino"), then
unlawfully pilfered and squandered hundreds of millions of dollars that Plaintiffs and the Class
had entrusted to them as financial investments. Subsequently, both Israel and Marino have pled
guilty to multiple criminal acts, and the Bayou Funds have essentially collapsed .
3. The financial fraud and other misconduct of the Bayou Defendants was aided an d
abetted substantially by Bayou's long-time banker, defendant Citibank, N .A. ("Citibank"). In
sum, defendant Citibank served as Bayou's lead banker. As such, Citibank received millions of
investment dollars from Class members it knew were fiduciary proceeds beneficially owned by
the Class, and processed millions of dollars in Bayou transactions . Nevertheless, Citibank
assisted defendants Israel and Marino in misappropriating Class member investor funds.
Specifically, beginning in or about July 2004, Citibank actually distributed some $161 million in
cash from five Bayou bank accounts maintained at Citibank in New York, directly to one or
more private bank accounts solely in defendant Israel's name at Deutsche Postbank in Hamburg ,
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Germany, despite knowing or ignoring that such proceeds were fiduciary funds beneficially
owned by Class members.
4. The financial fraud and other misconduct of the Bayou Defendants was also aide d
and abetted by defendants James G. Marquez ("Marquez"), Richmond-Fairfield Associates,
CPA, PLLC ("Richmond-Fairfield"), Jeffrey D. Fotta ("Fotta"), Eqyty Research and
Management, LLC, Eqyty Research and Management, LTD, Faust Rabbach & Oppenheim LLP,
and Steven D. Oppenheim (collectively with Citibank, the "Aider/Abettor Defendants"). In sum,
defendants Marquez, Richmond-Fairfield, Fotta, Eqyty Research and .Management, LLC, Eqyty
Research and Management, LTD, Faust Rabbach & Oppenheim LLP ("Faust Rabbach &
Oppenheim") and Steven D. Oppenheim ("Oppenheim") were close associates of Bayou and
Bayou's principals, defendants Israel and Marino; were directly or indirectly involved in
planning, orchestrating and/or executing the alleged fraud ; and directly or indirectly received
compensation misappropriated from Class member investors.
In addition, the investment advisor defendants Hennessee Group LLC (the
"Hennessee Group"), Elizabeth Lee Hennessee ("Lee Hennessee") and Charles J . Gradante
("Gradante") (collectively, the "Hennessee Defendants") also facilitated the wrongdoing by
failing to conduct proper due diligence of Bayou and the Bayou Hedge Funds prior to
recommending those investments to plaintiff Broad-Bussel Family and other investors, and then
by failing to monitor properly those investments, and are thus liable to those Bayou investors to
whom they marketed the Bayou Hedge Funds. Plaintiff Broad-Bussel family and other Class
member investors retained the Hennessee Defendants for the express purpose of properly
conducting such due diligence. However, despite the presence of numerous red flags regarding
Bayou's finances, operations and principals as set forth more fully below, the Hennesse e
Defendants failed to uncover and advise plaintiff Broad-Bussel Family and other investors of a
fraud that had been occurring for years . The principals of defendant Hennessee Group,
defendants Lee Hennessee and Gradante, are liable because they were the alter egos an d
controlled the acts of defendant Hennessee Group; personally solicited and recommended Bayou
investments to plaintiff Broad-Bussel Family and other investors ; personally failed to investigate
properly Bayou and Bayou's principals; and received direct or indirect compensation and were
unjustly enriched thereby.'
6. As the fraud began to unravel internally within Bayou in July 2005, defendan t
Israel sent a letter to Bayou investors informing them that Bayou was closing its businesses .
Significantly, however, that letter also assured Class member investors that all of their invested
funds would be distributed to them once the necessary liquidation audit was complete.
7. On August 25, 2005 -- the end of the proposed Class Period -- The New Yor k
Times first alerted investors to "the possible collapse" of Bayou and the Bayou Hedge Funds .
By August 29, 2005, The Wall Street Journal reported that a self-titled "suicide note and
confession", written by Bayou's CFO Dan Marino (who did not commit suicide), had been found
2 In the initial complaint they filed November 17, 2005, Plaintiffs also brought suit against
Sterling Stamos Capital Management, L .P. ("Sterling Stamos"). Subsequent to the filing of that
complaint, Plaintiffs have continued their investigation and conducted both formal and additional
informal discovery as to Sterling Stamos, among other things . As a result, Plaintiffs have not named
Sterling Stamos as a defendant in this Amended Complaint. Further, this action does not appear to
require notice to Class members or court approval because at this juncture no class has been certified in
these proceedings. See Federal Rule of Civil Procedure 23(e)(1)(A) ("The Court must approve any
settlement, voluntary dismissal, or compromise of the claims, issues, or defenses of a certified class .").
Plaintiffs Marie-Louise Michelsohn, Michelle Michelsohn and Herbert Blaine Lawson, Jr. reserve their
rights to add Sterling Stamos as a defendant in any further amended pleading or otherwise, or to pursue
their claims against Sterling Stamos in separate individual (i.e.,non-class) proceedings in state court.
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at Bayou's abandoned headquarters in Stamford, CT. That six-page note directly implicated
Marino, Israel and others in a massive fraud on investors of the Bayou Hedge Funds dating bac k
to 1996. Subsequent media and other reports indicate that the Bayou Hedge Funds are wholly o r
substantially insolvent, and that hundreds of millions of dollars of Class member investments are
missing and unaccounted for -- including the some $161 million of Class member investmen t
proceeds which Citibank distributed directly to one or more personal offshore account s
controlled solely by defendant Israel. At least seven Bayou entities have already commenced
bankruptcy proceedings as of the date hereof (see footnote 1, supra, and 1 44, infra).
$. Since Bayou's shocking collapse, numerous investigations have been commence d
by state, federal and regulatory agencies, several lawsuits have been filed, and Bayou's tw o
principals, defendants Israel and Marino, have pleaded guilty to multiple criminal counts. In
addition, some $101 million in suspected Bayou investor funds have been seized by the Arizona
Attorney General from several Wachovia Bank accounts in Flemington, New Jersey ; Plaintiffs
understand that those monies are the subject of civil forfeiture proceedings by the U .S.
Attorney's Office for the Southern District of New York and other litigations . In addition to
money damages, Plaintiffs, on behalf of themselves individually and other members of the Class,
seek the imposition of a constructive trust over such proceeds and further that such proceeds be
equitably distributed to members of the Class in accordance with their respective losses . Since
the Bayou Defendants' announcement in July 2005 that the Bayou Hedge Funds were being
closed and liquidated, none of the Bayou Hedge Fund investments has been returned to th e
Plaintiffs and other members of the Class.
9. Defendants' misconduct has caused Plaintiffs and the Class to suffer hundreds o f
millions of dollars in damages.
JURISDICTION AND VENUE
10. This Court hasjurisdiction over the subject matter of this action pursuant to 28
U.S.C. § 1332(d)(2)(A) because the matter in controversy is in excess of $5 million, exclusive o f
interest and costs; the matter is a class action in which at least one member of the Class is a
citizen of a State different from any Defendant; and the aggregate size of the proposed Class i s
believed to be greater than 100 members .
11. This Court also has jurisdiction over the subject matter of this action pursuant to
28 U.S.C. § 1331 because the claims of Plaintiffs and the Class arise under a federal statute, the
investment Advisers Act of 1940 (the "Investment Advisers Act"), 15 U.S.C. § 80b-6 and 15
U.S.C. § 80b-15, and thus present federal question jurisdiction .
12. This action is not preempted under the Securities Litigation Uniform Standard s
Act of 1998, 15 U.S.C. § 78bb ("SLUSA"), because, among other reasons, this case does involve
"covered securities" as defined by SLUSA, 15 U.S.C. § 78bb(f)(5)(E).
13. Venue is proper in this District pursuant to 28 U.S.C. § 1391(a). Many ofthe acts
and transactions giving rise to the alleged violations of law occurred in this District. In addition,
numerous of the Defendants maintain their principal executive offices or residence within this
District, or did so during the time of the alleged wrongdoing. Moreover, each of the Defendants
resides in the State of Connecticut, and/or transacts business in the State of Connecticut, and ha s
certain minimum contacts with State of Connecticut, and/or engaged in tortious conduct in the
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State of Connecticut, such that maintenance of this action does not offend traditional notions o f
fair play and substantial justice.
14. In connection with the acts, conduct and other wrongs alleged in this Amende d
Complaint, the Defendants, directly and indirectly, used the means and instrumentalities of
interstate commerce including the mail, the Internet and telephone communications .
THE PARTIES
The Plaintiffs
15. Plaintiff Broad-Bussel Family is a limited partnership organized under the laws o f
North Carolina with registered offices located in Chapel Hill, North Carolina . During the Class
Period, the Broad-Bussel Family invested in the Bayou Hedge Funds and was damaged as a
result of Defendants' misconduct.
16. Plaintiffs Marie-Louise Michelsohn, Michelle Michelsohn and Herbert Blaine
Lawson, Jr. (collectively, the "Michelsohn Plaintiffs") are citizens of New York. During the
Class Period, the Michelsohn Plaintiffs invested in the Bayou Hedge Funds and were damaged a s
a result of Defendants' misconduct .
The Bayou Defendants
17. Defendant Bayou Group LLC ("Bayou Group") is a limited liability company
organized under the laws of Connecticut and has principal offices located at 40 Signal Road,
Stamford, CT. Corporate records list defendants Israel and Fotta as being Principals an d
Members of Bayou Group .
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a. The Bayou Group has, or at times relevant during the Class Period had,
controlling and/or other equity interests in one or more of the Bayou Defendants and/or helped
create, operate and control the Bayou Hedge Funds .
b. The email domain used by one or more of the Bayou Defendants durin g
the Class Period was <<www.bayougroup.com». The registrant of this email domain is
defendant Bayou Securities. This email domain was used by Bayou for both internal email at the
40 Signal Road address in Stamford (e.g., info(bayougroup.com, podwyer(ODbayougroup.com),
and for external email addresses, such as those for promoters and agents of Bayou, including but
not limited to Howard Kra (e.g.,hkra(bayougroup.com).
18. The Bayou Hedge Funds include the following funds :
Defendant Bayou Fund, LLC ("Bayou Fund"), which is a limited liability
company organized under the laws of New York and has principal offices at 40 Signal Road ,
Stamford, CT;
b. Defendant Bayou Super Fund, LLC ("Bayou Super Fund"), which is a
limited liability company organized under the laws of Delaware and has principal offices at 40
Signal Road, Stamford, CT;
Defendant Bayou No Leverage Fund, LLC ("Bayou No Leverage Fund"),
which is a limited liability company organized under the laws of Delaware and has principa l
offices at 40 Signal Road, Stamford, CT;
d. Defendant Bayou Affiliates Fund, LLC ("Bayou Affiliates Fund"), whic h
is a limited liability company organized under the laws ofDelaware and has principal offices at
40 Signal Road, Stamford, CT;
C. Defendant Bayou Accredited Fund, LLC ("Bayou Accredited Fund"),
which is a limited liability company organized under the laws of Delaware and has principal
offices at 40 Signal Road, Stamford, CT; and
f. Defendant Bayou Offshore Fund, LLC, which is a company incorporated
under the laws of the Delaware.
19. Defendant Bayou Management LLC ("Bayou Management") is a limited liability
company organized under the laws of New York and has principal offices at the law firm of
defendant Faust Rabbach & Oppenheim LLP, 488 Madison Avenue, New York, NY -- Bayou's
outside law firm ("Faust Rabbach & Oppenheim") -- and at 40 Signal Road, Stamford, CT .
Bayou Management served as the investment advisor to, and manager of, the Bayou Hedge
Funds. Bayou Management maintained primary bank accounts at defendant Citibank an d
additional accounts at Wachovia Bank.
20. Defendant Bayou Partners LLC ("Bayou Partners") is a company with principal
offices at both 40 Signal Road, Stamford, CT and 27 Beaver Place, Boston, MA -- the hom e
residence of defendant Fotta. Defendant Bayou Partners was involved in soliciting investmen t
funds from members of the Class and other prospective Bayou investors, including specificall y
at investor conferences held in Miami, FL in October 2000 and in Monte Carlo, Monaco in
September 2000. According to its own investment literature, Bayou Partners purported to
provide "advisory services to managers and investors in the alternative sector" and "specializes
in identifying emerging managers ($25-500 Mill.) and positioning them in institutional
investment portfolios, either through structuring multi-manager product or direct allocation ."
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